US equities are fast approaching bubble territory, Pictet Asset Management's chief strategist Luca Paolini has warned.
The strategist’s caution sits within the Geneva asset manager’s house view that the so-called US bubble index is rapidly nearing the ‘danger’ zone.
Paolini said, at the current rate of growth, the US bubble index will hit the one standard deviation from trend at the end of May 2018.
The index is based on the average standard deviation from trend of 10 macro and market indicators.
Historically, the graph shows that the US bubble index has only breached the threshold of the ‘bubble or major peak’ level on four occasions in the last 40 years: 1997, 2000, 2001 and 2007.
‘Every time the index rose above 1 - September 1987, March 2000 and June 2007 – US equities experienced a major peak in the following months,’ Paolini said.
Only two of the 10 indicators included in the index are not consistent with a major market peak this year. These include flows into equity funds and M&A activity.
‘The level of S&P 500 index consistent with valuation going back to previous all-time highs is in the 2950-3000 range – i.e. c. 9% upside from current levels, on our calculations.’